Saturday

Theory of Accounting (HSEB Grade 11)


# MEANING OF BOOK KEEPING: 
                The owner of accountant can’t keep in memory all the financial transactions of the business for the whole year; therefore, every financial transaction should be recorded day to day in the books of account. The process of recording day to day financial transactions in the book of account systematically and scientifically is called the book-keeping. Moreover, it is the both art and science of recording transactions. It includes journalizing, posting to ledger and balancing it.

# OBJECTIVES OF BOOK-KEEPING:
1.    To keep permanent record of all the financial transactions.
2.    To provide basis for determining the profit or loss made by the firm during any particular period.
3.    To help disclose the financial position of the business.

# MEANING OF ACCOUNTING: 
             Accounting is the process of recording, classifying and summarizing all the financial transactions to ascertain the business operation and the financial position at the end of given period and interpreting and communicating to the users. Its is both art and science. It is art because it requires certain practical works and skill. It is science because it is based on certain rules and regulations. It is wider term than Book-keeping.

# OBJECTIVES OF ACCOUNTING:
1.    To keep systematic and scientific record of all the financial transaction as per uniform rules and regulations.
2.    To find out the profit and loss made by the firm during certain period with the help of profit and loss account and trading a/c
3.    To ascertain the financial position of the business wit the help of balance sheet.

# FEATURES OF ACCOUTING
1.    Accounting is related only to financial transactions.
2.    Accounting is the act of recording financial transactions.
3.    It is the process of classifying and summarizing financial transactions.

# LIMITATION OF ACCOUNTING
1.    It ignores all non-financial aspects of the financial transactions.
2.    There is no uniformity in the methods of valuing stock, charging depreciation, maintaining provision.
3.    It ignores the price level change.

# MEANING OF DOUBLE-ENTRY SYSTEM OF BOOK-KEEPING: 
         Every transaction has two fold aspects. One is receiving aspects and another is giving aspects. Receiving aspects is debited and giving aspects is credited. Every debit has corresponding credit and every credit has corresponding aspect and vice-versa which is known as Double-entry system of Book-keeping. It is modern and scientific method of recording transactions.

# FEATURES OF DOUBLE-ENTRY BOOK-KEEPING SYSTEM
1.    It has two aspects which is debit and credit.
2.    It has equal amount. One aspect of transaction is debited and another is credited with the same amount. All the total amount of debit is equal to the all the total amount of credit.
3.    Classification of account: It classifies the account in to three accounts that is personal, real and nominal a/c.

# OBJECTIVES OF IMPORTANCE OR ADVANTAGE OF DEOUBLE ENTRY BOOK-KEEPING SYSTEM
1.    To find out the true profit and loss made by a business firm during a certain period of time.
2.    To show the true financial position of a business at the end of each year.
3.    To rectify errors and minimize frauds.

# MEANING OF DEBIT NOTE: 
        It is a note send to a supplier informing him that his account has been debited to the extend of goods returned to him. It is also send to a customer informing him that additional amount is recoverable from him or difference in price.

# MEANING OF CREDIT NOTE: 
              It is notes send to a customer informing him that his account has been credited to the extent of goods returned by him or send to a supplier informing him about the difference in price.

# SCOPE OF ACCOUNTING
1. In trading concern: Accounting is essential to calculate true profit and loss and financial position of the business. Accounting information is useful to interested parties. So, accounting is very useful system to manage the trading concern.
2. In non-trading concern: The main objective of non- trading concern is to provide services to the society. Accounting helps to keep complete and accurate records of their expenditure and revenue as well as resources owned by them. So, accounting is also applicable to non-trading concern.
3. To Government: To control and manage government income and expenditure, it also needs proper accounting system. To record the government economic events and transactions. There is a separate accounting system.

# DIFFERENCE BETWEEN BOOK-KEEPING AND ACCOUNTING
Book-keeping
Accounting
1. It is a part of accounting.
1. It is a wider term than book-keeping.
2. It does not need highly qualified manpower.
2. It needs highly qualified manpower.
3. It is concerned with recording of financial transactions.
3. It is not only concerned with recording but also concerned with classifying, summarizing, communicating of accounting information.

# MEANING OF BUSINESS ENTITY CONCEPT: 
           Under this concept, business is treated as a separated unit from its owner. Only the business transactions are recorded but the personal transactions are not recorded. However, the owner’s investment in the business and drawings are recorded in the books of business. If the personal the result of operation and financial position of the business will not be true.

# MEANING OF GOING CONCERN CONCEPT: 
              Under this concept, it is assumed that a business will continue for a long time and flow of transactions to be continuous. It is assumed that the benefits from the certain expenditure will continue for a long time. In this concept, assets are classified into fixed and current assets and liabilities into short term and long term.

# MEANING OF MONEY MEASUREMENT CONCEPT: 
             Under this concept, only those transactions which can be expressed in monetary value such Rs, $, etc. are recorded but the transactions which cannot be expressed in monetary value are not recorded. Labour efficiency, quarrel between managers and workers are not recorded because their monetary management are not possible.

# MEANING OF COST PRINCIPLE: 
           Under this principle, assets are recorded in the books of account at actual cost of purchasing rather than market value of assets. If machinery is purchased for Rs 11 lakhs, then, the machinery is recorded as Rs 1 lakh only. If its market value to be Rs 2 lakh or Rs 50,000, the cost price of the assets is gradually reduced by a process called depreciation.

# MEANING OF ACCOUNTING PERIOD CONCEPT:
           The owner of the business can’t unite the whole life of the business, determine profit and loss. Hence, under this concept, the whole life of this concept is divided in to suitable periodic intervals to find out the result and financial position of the business. This periodic interval is known as accounting period. Generally, one year period is considered suitable accounting period which begins from 1st January or 1st Baishak and ends on 31st December or Chaitra last.

# QUALITIES FO A GOOD CHEQUE
1.    The date should be written properly in the cheque and should be presented to the bank with in the valid period.
2.    The account number, amount in words, amount in figures should be mentioned properly.
3.    The account holder must sign on the cheque which should be completely similar to the specimen signature.

# OBJECTIVES OF TRIAL BALANCE
1.   To check the arithmetic accuracy: One important purpose of preparing trial balance is to provide check on arithmetical accuracy of financial transaction.
2.   To help to locate accounting errors: Since the trial balance indicated it there is any error committed in the journal and ledger. It helps the accountant to locate the errors.
3.   To provide the basis for preparing final account:  Since the trial balance is a statement of debit and credit balances of ledger accounting, it provides the basis for preparing final accounts.

# MEANING OF ERROR OF OMISSION
            If a transaction is not recorded at all in the books of original entry (Journal). In both, debit and credit side, this will not affect the trial balance. Such type of error is known as error of omission. For e.g. If goods sold to Krishna worth Rs 150, is not recorded in the journal.

# MEANING OF ERROR OF COMMISSION: 
                   If the wrong amount is recorded in the journal, same amount affects the dr. and cr. Side of trial balance. So, trial balance will be equal. For e.g. Goods sold to Shyam for Rs 550 is recorded in the journal entry by mistake as Rs 50 

# MEANING OF ERRORS OF PRINCIPLES: 
             Errors committed due to lack of accounting rules and regulations by the record keeper are known as errors of principles. For e.g. Computer purchased for Rs 20,000 has been debited to purchase a/c.

# MEANING OF COMPENSATING ERROS: 
                 If the effect of one error is neutralized, by the effect of another effort then such error is called compensating errors. For e.g. While posting on the credit side of Krishna a/c Rs 500 is posted instead of Rs 50 while posting credit side or Ram a/c Rs 50 is posted instead of Rs 500.

# MEANING OF RESERVE: 
            A reserve is a part of profit saved aside to meet the future emergency and losses. The part of profit is retained on the business either for meeting its unexpected future liabilities and losses for strengthening financial position.

# MEANING OF PETTY CASH FUND:  
                    It is an amount which is maintained in government offices for making payments of small amounts. It is always equal to its original amount of previous period. It separates small payments from major payments.

# MEANING OF REVENUE RECEIPTS: 
           It is an amount which is received from the regular transactions of a business. It is the amount received from the sale of goods and services and it is the main source of income. It is shown under the credit side of the trading a/c and profit and loss a/c, For e.g. Amount received from the sales of goods and services, amount received by the way of discount, rent, commission etc.

# MEANING OF CAPITAL RECIEPTS: 
                 An amount received in the form of capital from the owners and as loan by outsiders is known as capital receipts. Besides any income receive by selling shares and fixed asset and also fall under it. It is treated as liability and is shown on the liability side of the balance sheet.

# DIFFERENCE BETWEEN REVENUR AND CAPITAL RECEIPTS
Revenue receipts
Capital receipts
1. It is of regular nature.
1. It is one irregular nature.
2. It is shown on the credit side of trading account and profit and loss account.
2. It is shown on the liabilities side of the liabilities side of the balance sheet.
3. Amount received from the sell of goods and services or by the way of discount, interest, commissions are the example of revenue receipts.
3. Amount received from owner as capital or in the form of loans are the examples of capital receipts.

# MEANING OF REVENUE EXPENDITURE
Any expenditure incurred in connection with the operation of daily activities of the business is called Revenue expenditure. It is incurred for maintaining earning capacity and working efficiency of the fixed assets. It is shown on the debit side of trading account and profit & loss account. For e.g. salary paid to staffs, repairs of assets, rent paid to house owner.

# MEANING OF CAPITAL EXPENDITURE: Any expenditure made in obtaining fixed assets is called capital expenditure. It increases the earning capacity of the business. It is shown on the assets side of the balance sheet. Expenses related to purchase of land, building, furniture, machinery, etc. are the examples of capital expenditure.

# DIFFERENCES BETWEEN REVENUE AND CAPITAL EXPENDITURE
Revenue expenditure
Capital expenditure
1. It is of regular nature.
1. It is of irregular nature.
2. It gives benefits not for more than a year.
2. It gives benefits over a number of years.
3. It is shown on the debit side of trading account and profit & loss account.
3. It is shown on the asset side of the balance sheet.

# MEANING OF CAPITAL RESERVE: A reserve which is created out of capital profit is known as capital reserve. It is not created out of the profit earned in normal course of the business. Profits on sale of fixed assets, profit of sale on investment are the sources of capital profit.

# MEANING OF REVENUE RESERVE: A reserve which is created out of revenue profit is known as revenue reserve. Revenue profit is earned in the normal course of the business. It is created for strengthening the financial position of the business.
                   
# MEANING OF GENERAL RESERVE:  A reserve which is created out of the profit not for a specific purpose is known as General reserve. It is used for general purpose as per the discretion of the management. It is created out of the profit earned in ordinary course of the business.

# FEATURES OF GOVERNMENT ACCOUNTING
1.   Budget Heads: All the expenditures of government offices are classified in to different budget heads and expenditures are made only in approved budget heads.
2.   Banking transactions: All government transactions are expected to be performed through bank by maintaining a secret bank accounting except the pretty cash fund.
3.   Auditing: The office of Auditor General performs the audit of books of accounting of the government of the government offices.

# OBJECTIVES OF GOVERNMENT ACCOUNTING
1.    To record financial transactions of Revenue and expenditure relating to the government organizations.
2.    To avoid the excess expenditure beyond the limit of budget approved by the government.
3.    To make expenditures according to the rules and regulations of the government.

# FEATURES OF NEW ACCOUNTING SYSTEM
1.   Double entry system: The new accounting system is based on double entry system under which one aspect is debited and another aspect is credited.
2.   Classification of offices: The new accounting system classifies the government offices into central level and office and operating level office.
3.   Use of forms: The new accounting system has prescribed 200 forms to be used by government offices.

# OBJECTIVES OF NEW ACCOUNTING SYSTEM
1.    It gives systematic records of government transactions which support to prepare different statements and reports.
2.    The annual budget is prepared by the government every year for which new accounting system provides historical financial data and information.
3.    It safeguards different government properties like furniture, machinery, land and building.

# DIFFERNCE BETWEEN GOVERNMENT ACCOUNTING AND COMMERCIAL ACCOUNTING

Government accounting
Commercial accounting
1. The accounting system maintained by the government offices is known as government accounting.
1. The accounting system maintained by the business organizations established to earn profit is known as commercial accounting.
2. It strictly follows the government budgeting system.
2. It does not strictly follow the government budgeting system.
3. Office of Auditor General does the audit of book of accounting of government offices.
3. A professional person like C.A. or any other auditor does the auditing of goods of accounting of business organizations.